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WTO Rules Against India in Sugar Subsidy Case: All You Need to Know

Dec 18, 2021 10:06 AM 7 min read

On Tuesday, a WTO panel ruled that India’s subsidies for the production and export of sugar and sugarcane violated international trade rules that require agricultural incentives to be capped at 10% of the value of production (VoP).

In its 115-page report (pdf), the trade body asked India to "withdraw its prohibited subsidies...within 120 days".

For its part, GoI has characterised the panel's findings as "erroneous" and "completely unacceptable" and pledged to file an appeal against the decision (official statement).

The WTO sugar saga has been playing out since July 2019, when Australia, Brazil and Guatemala brought a case against India. The recent verdict comes at a time when India’s critical sugar industry is at a historic crossroads, with its future pathway likely to be immune to WTO ire - or even international sugar prices, actually.

But before we delve into that, let’s brush up on the basics…

The Indian Sugar Industry: An Overview

Five things you need to know. The sugar industry in India is (1) big, (2) highly unique, (3) highly regulated, (4) highly clustered, and (5) highly cyclical.

The industry involves 50 million farmers and 5 lakh workers directly employed in sugar mills. The country is the second-largest producer of sugar in the world after Brazil (although in recent years it has grabbed the top spot as Brasília has shifted focus towards ethanol blending) and is also the largest consumer. India’s annual sugar output is worth c. ₹80,000cr ($10.5bn). There are over 700 installed sugar factories across the country whose capacity is distributed more or less equally between private sector units and cooperative sector units.

Now, sugarcane is a sturdy but perishable crop with a limited shelf life. This means it’s indispensable to minimise the harvest-to-crush time, so fields and crushing mills need to be located close to each other. This has led to sugarcane being a highly clustered cash crop, with four-fifths of production being commanded by only three states - UP, Karnataka and Maharashtra. Inadvertently, such high concentration levels mean floods or irregular rains in any of these states adversely impacts overall outputs, which is why sugar is a very volatile commodity.

Because it employs so many people, the sugar industry has considerable political clout and has the presence of the Government at every stage. The sugar value chain begins with farmers, who grow sugarcane and sell the same to mills. And mills are typically located in close proximity and required by law to buy cane (1) from only farmers within a specified area (although this policy is under reconsideration - see Rangarajan Committee Report) and (2) at a stipulated minimum support price (MSP) aka the Fair and Remunerative Price (FRP), making the crop the biggest experiment yet in a legally guaranteed MSP.

Sugar isn’t the only thing that comes from sugarcane. The latter’s molasses are the raw materials for most of India’s ethanol output, which is being tapped to dilute the country’s reliance on crude oil imports.

Then there’s its cyclical nature. During bumper seasons, a lot of sugarcane is churned out, which mills have to buy at a fixed FRP. But because excess crop = low market prices, mills are forced to operate at heavy losses (FYI: domestic demand for sugar has remained more or less stable over the years even as supply has fluctuated wildly). Naturally, mills adapt by scaling back production, reducing supply so that prices soar again, and then ramping up production once more. This circular to-and-fro process is why sugar prices are so mercurial.

FYI: About 60% of domestic sugar demand is B2B, primarily from the FMCG segment. The bulk of the remaining demand is from consumers.

FYI #2: On an average, 95 kg of sugar and 10.8 litres of ethanol can be produced from 1 tonne of sugarcane.

Now, let’s circle back to the WTO…


What Were the Issues at the WTO?

According to the WTO’s report, the following factors were a thorn in the plaintiffs’ side:

  1. The FRP
  2. A  number of "State-Advised Prices" (SAPs), which are basically MSPs, but notified by State Governments
  3. A number of policies and payments provided by Union and State Governments to assist mills in paying the FRP to farmers
  4. Non-exempt direct payments and other monetary incentives (by Tamil Nadu, Andhra Pradesh and Karnataka in particular)
  5. Export subsidies - specifically, the Production Assistance Scheme, Buffer Stock Scheme, Marketing and Transportation Scheme, and Duty Free Imports Authorisation Scheme

Australia, Brazil and Guatemala argued that India’s domestic support mechanisms for its sugar industry exceeded the de minimis level of 10% of VoP and “therefore acts inconsistently with its obligations under Article 7.2(b) of the Agreement on Agriculture”.


What Was the WTO's Verdict?

The Geneva-based organisation ruled that between 2014-15 to 2018-19, “India provided non-exempt product-specific domestic support to sugarcane producers in excess of the permitted level of 10%...Therefore, we find that India is acting inconsistently with its obligations”.

The panel also ruled that New Delhi’s export subsidies “are contingent on export performance [and] are inconsistent with…the Agreement on Agriculture”.

Basically, it was recommended that India bring its “WTO-inconsistent measures into conformity with its obligations”.


What is India’s Stance?

Throughout the case, since 2019, India has consistently maintained that the plaintiffs “have failed to meet their burden of showing” that it provides market price support for sugarcane that exceeds the 10% VoP level. It has countered that all its policies are in tandem with WTO rules.

In a strongly-worded statement on Tuesday, the Union Ministry of Commerce and Industry said the WTO panel had "evaded key issues which it was obliged to determine" and said its conclusion on "alleged export subsidies undermines logic and rationale".

GoI has said there would be “no impact” on any of India’s “existing and ongoing policy measures” in the sugar sector and that an appeal would be filed against the decision soon.


Now What?

The WTO drama may just be background noise for the Indian sugar industry right now. This is because of three reasons.

One, the industry had a good year, harvest-wise, and 3.8 MT of exports have already been contracted without availing any subsidies.

Two, Brazil is slated to see subdued sugar production in the near-term due to supply bottlenecks and adverse climatic conditions. This means a larger global market reliant on India - the next big producer.

Three, the domestic ethanol blending programme is taking off. This means farmers and mills soon won't have to be overly bothered with exports and can instead sell bumper crops to ethanol blenders. By 2025, 6 MT of cane is expected to be diverted towards the programme.

The WTO development might have instilled modest pressure on sugar stocks with sugar companies trading down a tad bit following the news. However, the performance over the last year has been quite stellar, largely driven by the aforementioned factors. As such, the sector seems fairly well-placed:


Postlude #1: An Outdated System?

While India’s sugar industry may be breathing easy, the ruling is undoubtedly bad news for the country. Mainly because there are many other agri-related cases against India pending at the WTO. These include cases regarding domestic support to wheat, rice, cotton and pulses - commodities where the export part of the equation is far more substantial.

As for sugar, it may be interesting to note that India is not the first country to be found guilty of subsidising its cane farmers. Thailand had numerous similar price-supporting schemes, many of which it restructured after Brazil raised concerns. At its peak in 2006-07, the EU's support systems for its sugar sector was a stunning 177.36% of VoP. Again, Brazil opposed this at the WTO, which ruled against the EU in 2005, leading to Brussels phasing out price interventions by 2009.

WTO Rules Against India in Sugar Subsidy Case: All You Need to KnowWhile Brazil and the other countries may have valid reasons to object to India’s agri policies, this occasion might be a good time to revisit the skewed Aggregate Measurement of Support (AMS) system. It refers to the annual level of monetary support (product-specific subsidies + non-product specific subsidies) that a country can provide to its agricultural sector

The status quo at the WTO entitles developing countries like India to 10% AMS limits while countries like the US - whose VoP was around 65% in 2016 - are exempted from such restrictions altogether. No wonder that countries in the Global South have repeatedly called for scrapping the AMS aka “the most trade-distorting element in the global trade of agriculture”.


Postlude #2: The Road to a Legal MSP

The WTO verdict comes at the heels of the end of the year-long farmer protests, the repeal of the farm laws, and increasingly loud demands for a legal backing to the MSP regime.

As noted earlier, private mills are required by law to buy produce from cane farmers at set prices. Over the years, though, faced with surplus stocks, low prices and limited liquidity, mills have failed to make regular payments, which has resulted in a lot of dues. Given that the FRP is the biggest concern for other countries at the WTO, an expansion of legal MSP could mean both fiscal rethinking and framing the policy in a WTO-compliant manner. Both of which are tall orders, to put it mildly.

(Read our previous coverage on legal MSP here.)


Postlude #3: Hitting the Ethanol Sweet Spot

Most of the sugar produced by Indian mills is consumed within the country (we Indians are known for having a sweet tooth, after all). Excess stocks are channeled towards exports but international sugar prices are usually much lower. In November 2020, for instance, sugar contracts at international markets were trading at ₹21-22 per kg while the cost of production was at ₹32. Mills are reluctant to foot the difference - it makes no financial sense, after all - but Government subsidies tend to incentivise them.

But needless to say, shelling out taxpayer money to make a mark in global sugar markets is not a sustainable enterprise. It’s also regularly been a cause for tensions between GoI and cane farmers. This is where ethanol comes into the picture. You have a bumper cane crop in a season? Take a leaf out of Brazil’s book and sell most of it to the ethanol blending sector so that the latter can blend the molasses to reach 20% ethanol-blending (E20) in petrol in the next four years. Farmers don’t have to concern themselves with price fluctuations, mills don’t have to be worried about surplus stocks, and ethanol-blenders can blend away. Win-win-win!

(Read our previous coverage on ethanol blending here.)


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